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ICAP PRC-3 Business and Economic Insights study materials
ICAP PRC-3 Business and Economic Insights study resources

ICAP PRC-3 Business and Economic Insights: Financial markets and instruments

ICAP PRC-3 Business and Economic Insights · Work through your exam, one topic at a time.

All guide sections

Financial markets and instruments

This domain tests the plumbing of the financial system: who borrows and lends, through which instrument, at what price, and under which regulator. Expect calculations on bond pricing and yields plus conceptual questions on derivatives and Islamic finance.

Core concepts

  • Market segments: money market (T-bills, commercial paper, repos, interbank lending - under one year) versus capital market (bonds/sukuk, equity). Primary market raises new funds; the secondary market provides liquidity and price discovery.
  • Bond pricing: price = present value of coupons + present value of the redemption amount, discounted at the market yield. Price and yield move inversely; the longer the duration, the greater the sensitivity. Current yield ignores capital gain or loss; yield to maturity does not.
  • Equity valuation: dividend discount model P0 = D1 ÷ (r − g); P/E multiples for relative valuation.
  • Derivatives: forwards (bespoke, credit risk), futures (standardised, margined, marked to market daily), options (premium paid, asymmetric payoff), swaps (exchange of cash flows). Hedging transfers risk; speculation takes it on.
  • Islamic finance: prohibition of riba, gharar and maysir; murabaha (cost-plus sale), ijarah (lease), mudarabah and musharakah (profit-sharing), sukuk (asset-backed certificates).
  • Institutions: SECP regulates securities and corporate disclosure; SBP regulates banks and monetary policy; PSX handles trading; NCCPL clears and settles.

Worked example

A five-year bond has a face value of PKR 1,000 and a 10% annual coupon; the market yield is 12%. Price = 100 × 3.6048 (annuity factor at 12%, five years) + 1,000 ÷ 1.7623 = 360.48 + 567.43 = PKR 927.91. The bond trades at a discount because its coupon is below the market yield; if yields rise further, the price falls again.

Traps that cost marks

Using the coupon rate instead of the yield as the discount rate; treating current yield as total return; forgetting that futures are marked to market daily while forwards are not; reversing call and put payoffs.